On September 20, the Federal Reserve delivered a message that reverberated through financial markets: Interest rates are expected to remain at their highest levels in more than two decades, perhaps longer than most market participants expect. This position comes against the backdrop of stubbornly high inflation, with the core inflation rate hovering at 4.2%, well above the central bank’s target of 2%, and the unemployment rate at unprecedented low levels.
As investors grapple with this new reality, a pressing question arises: Will the S&P 500 and Bitcoin (BTC) continue to underperform in the face of tighter monetary policy?
The impact of the Fed’s decision was swift and severe. The Standard & Poor’s 500 index fell to its lowest level in 110 days, indicating growing anxiety among investors.
It is worth noting that 10-year Treasury yields rose to levels not seen since October 2007. This movement reflects the market’s belief that interest rates will continue to rise, or at the very least that inflation will eventually catch up with the current yield of 4.55. %. Either way, concern is mounting about the Fed’s ability to maintain high interest rates without destabilizing the economy.
Bitcoin does not necessarily follow traditional markets
One interesting development amid this financial turmoil is the apparent disconnect between the S&P 500 and cryptocurrencies, especially Bitcoin. Over the past five months, the 30-day correlation between the two assets has not shown any clear trend.
This divergence suggests that Bitcoin has anticipated a stock market correction, or that external factors are at play. One plausible explanation for this disconnect is the hype surrounding the potential introduction of a Bitcoin exchange-traded fund and regulatory concerns that have hindered the cryptocurrencies’ upward potential. Meanwhile, the S&P 500 benefited from strong Q2 earnings reports, although it is important to remember that these numbers reflect the situation from 3 months prior.
As the Fed sticks to its commitment to higher interest rates, the financial landscape is entering uncharted territory. While some may interpret the central bank’s stance as necessary to combat inflationary pressures, others worry that keeping interest rates high could burden households and businesses, especially as existing loans come due and must be refinanced at much higher rates.
A decoupling could favor Bitcoin’s price
Several factors could decouple cryptocurrencies from traditional markets, such as the S&P 500. If the government faces difficulties in issuing longer-term debt, it could raise concerns. Failure to issue long-term bonds may signal financial instability, motivating investors to look for hedges against a potential economic downturn. In such cases, alternative assets such as gold and Bitcoin may become attractive options.
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Even with a strong dollar, inflation can force the US Treasury to raise the debt limit, causing the value of the currency to depreciate over time. This risk remains as investors seek to protect their wealth in assets less susceptible to inflation.
Moreover, the state of the housing market plays a pivotal role. If the housing market continues to deteriorate, this could negatively impact the broader economy and the S&P 500. The housing market’s interconnectedness with the banking sector and the potential for deteriorating consumer credit could lead to a flight into assets with scarcity and hedging capabilities.
There is also the possibility of political instability, globally or even during the US elections in 2024. This could create uncertainty and impact financial markets. In some countries, there is a growing fear of capital controls, and historical examples of international financial embargoes highlight the risk of governments imposing such controls, pushing investors towards cryptocurrencies.
Ultimately, unlike traditional stocks and bonds, cryptocurrencies are not linked to corporate profits, growth, or returns above inflation. Instead, they march to the beat of their own drum, influenced by factors such as regulatory changes, resilience to attacks, and predictable monetary policy. Thus, Bitcoin could significantly outperform the S&P 500 without requiring any of the scenarios discussed above.
This article is for general information purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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